the deifintions of hedging,speculation and arbitrage?
Hello, I am very new to all the financial terms and can’t see clearly the differecnes between hedging, speculation and arbitrage. so would you give me clear distinctions between these things and few examples? Thanks and Happy New Year! A: Hedging is reducing the risk of a portfolio of investments by incorporating assets that are not perfectly correlated with one another. The lower the correlation coefficent, the more risk reduction is achieved. This is usually achieved through financial derivatives, such as options, futures and forwards. These instruments are generally negatively correlated with their underlying assets. In English, that means that if you want to reduce your risk on an investment, you buy something that goes up in value when your initial exposure goes down in value. For example, if I’m an orange farmer and I have a crop of oranges that’s going to be ready for sale in 3 months, I obviously want the price of oranges to go up. I also get hosed if the price of oranges decre
